Contract of Indemnity

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In this section we shall understand the concept of “Contract of Indemnity”. ‘Contract of Indemnity’ falls under the ‘Indian Contract Act, 1872’ in Section 124. It is considered as a special type of Contracts But before that we need to understand what ‘Indemnity’ means.

Indemnity is basically a protection or security against a loss/probable loss. In layman terms we call it Insurance. Insurance gives the individual/company a sort of a protection against loss or damage. The protection could be financial or otherwise.

Scenario

Kabir owns a car. He approaches BDN Insurance Company to provide insurance for his car in case of a theft or damage (by accident). For that Kabir has to pay a price. That price is known as an ‘Insurance Premium’. In return of that Premium, BDN Insurance Company will make a written promise to insure Kabir’s car. So in this scenario, both these parties have come into a contract wherein one party pays an amount in return of protection from a possible/probable loss.

In legal terms this means that BDN Insurance Company is Indemnifying

BDN Insurance Company becomes the Indemnifier

Kabir becomes the Indemnified or Indemnity Holder.

When does the Liability of the Indemnifier arise?

We would now understand as to when ‘BDN Insurance Company’ becomes liable to pay for the loss/damage. In simplest of terms, the moment there is any sort of loss/damage to Kabir’s car and BDN Insurance Company comes to know about it, they become liable to pay. In legal terms it means that the Liability of the Indemnifier arises when the loss of the Indemnified becomes Absolute. The insurance Company is now the one holding the responsibility.

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Let us assume that Kabir was paying a bi-annual premium for the car. He had purchased his car for Rs. 7,50,000/-. The bi-annual premium he pays is Rs. 5000. While driving on the highway, some car from behind bumps into his car and the hind portion of the car is severely damaged. Now, the loss has arisen. Will BDN Insurance Company pay him Rs. 7,50,000 or will they pay the sum of all Insurance premium(s) paid by Kabir so far?

The answer is No to both. The vehicle is inspected and the loss amount is ascertained. The company will pay for ONLY covering the loss. Moreover, another important aspect to see here is if the part/portion damaged was inherent to the vehicle or not? Inherent, here, means that something without which it is difficult to run the vehicle. Damage to a window glass or the wind shield should be covered, but damage to the sun-film put on it doesn’t fall under this category. So, in simple terms, if there is a loss to any of the embellishments made to an inherent part, that loss will not be made good by the Insurance Company.

In case of no losses, can the Indemnified claim his premium back from the Indemnifier?

Premium is the amount an Indemnified pays to the Indemnifier as a protection against the losses or damages mentioned in the agreement. In case the agreement was for a period of 5 years and at the end of it, we realize that fortunately, there were no losses or damages done to the insured property. Even then, the Indemnified cannot go back to the Indemnifier asking him to return the money. It was a price he paid to shift his risk on to a Third Party and there is no such thing as a free lunch.

Thus, we can state that the Contract of Indemnity is a good way to shift the risk from us on to another party by agreeing upon the same and paying a nominal price for it.